During the past two fiscal years, the Schenectady school district's surplus plunged 73 percent, or about $4 million, so it could cover its bills, state auditors said.

"The substantial decline in fund balance was primarily the result of the board appropriating significant amounts of fund balance as a financing source to support operations during the 2011-12 through 2013-14 fiscal years," the comptroller's financial report states. Cutting into the fund balance hurts the district's financial flexibility, the audit said.

But Schenectady school board President Cathy Lewis and Superintendent Larry Spring said that the more relevant number is the $62 million in so-called foundation state aid the district is being shortchanged.

"My question to the comptroller is that we're being shorted $62 million," Spring said. "It's not like we're shirking our duties and afraid to make cuts and difficult decisions."

In fact, Spring said he raised that imbalance in the distribution of state aid with the representatives from Comptroller Tom DiNapoli's office and encouraged them to investigate the problem. In July, the district filed a complaint with the Justice Department that names DiNapoli's office as a respondent, alleging that the current state aid funding formula discriminates against students who are minorities, speak English as a second language and have disabilities and is a civil rights violation.

A similar complaint was dismissed by the federal Department of Education on the grounds that it was outside their jurisdiction to investigate. Spring has said about 66 percent of the 10,000 students in Schenectady schools are minorities, and between 350 and 400 speak English as a second language.

The state audit also found that the kindergarten through Grade 12 district of 9,600 students relies on short-term borrowing in the form of revenue anticipation notes or RANs in January to pay its bills and employees until they get state aid in March.

For example, the district issued $19 million in RANs for the 2011-12 and 2012-13 school years and $15 million in the 2013-14 academic year. That resulted in debt-related expenses and interest of more than $824,000 over that time, auditors said.

Lewis said short-term borrowing is a common practice among school districts in the Empire State.

"Every school district in general relies on revenue anticipation notes but I guess we'll watch it more closely," said Lewis, noting she was not surprised by the findings of the audit. "There is probably not a district that monitors its finances more closely because we're so tight."

Still, Spring in the district's response, agrees with three recommendations by auditors.

He said Schenectady will develop and adopt a fund balance policy, devise a plan to alleviate the need to issue RANs to meet cash flow and continue to adopt general fund budgets that include realistic estimates so future spending plans are structurally balanced, without relying on fund balance as a financing source.

On the bright side, state auditors contend that the district in the 2014-15 budget did not use fund balance as a funding source and that "significant revenue estimates and appropriations appeared reasonable."

In May, voters approved a $164.3 million budget for 2014-15 that raises school taxes by 2.75 percent, about $60 annually for a house assessed at $100,000.